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Begin inventory +production cost = sales +end inventory
Part 2 : Decide to add or delete a product line using relevant
information
Example:Dep1 Dep2 Total DepII
Sales 7000 8000 15000 8000Less V.C (6000) (7000) (13900) (7000)C.M 1000 1000 2000 1000Less F.C
Avoidable cost (100) (300) (400) (300)Un avoidable (800) (100) (900) (900)
O/I 100 600 700 (200)
In this example we must keep dept. 1
Avoidable Cost: are costs that will not continue if an ongoing operationis changed or deleted
Unavoidable Cost: are costs that will continue even if operation halted
To decided to delete Dep. 1 or notIf the remaining C.M after reducing avoidable fixed cost will not contribute
any $ for covering F.COr C.M > avoidable fixed costs
Example:Dep1 Dep2 Total DepII
Sales 7000 8000 15000 8000Less V.C (6800) (7000) (13900) (7000)C.M 200 1000 1200 1000Less F.C
Avoidable cost (100) (300) (400) (300)Un avoidable (1100) (100) (1200) (1200)
O/I (1000) (600) (400) (500)
In this example we must closed dept. 1Example:X Y Total YII
Sales 5000 4000 9000 4000Less V.C (3000) (2000) (5000) (2000)C.M 2000 2000 4000 2000Less F.C
Avoidable cost (1500) (1000) (2500) (1000)
Chapter 5 1
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Managerial Accounting and control
Dr. Mohamed YoussefLecture 4
Un avoidable (2000) (500) (2500) (2500)O/I (1500) (500) (1000) (1500)
In this case we closed X
Part 3 : Compute a measure of product profitability whenproduction is constrained by scareresource.
Example:A B Total
UCM $5 $8Units 100 200C.M 500 1600 2100
Our capacity is 4000 Machine hours, and unit from product A needs 2 H andfrom product B 10 HCM/ H for product A = 5/2 =2.5CM/ H for product B = 8/10 =0.8
We can produce 2000 from product AFor product A 2000 X 2 X2.5 = 10,000 or
We can produce 400 from product BFor product B 400 X 10 X0.8= 500
Before introducing the effect of scarce resource B mach better than ProductA, but after producing a scarce resource product A muchbetter than product B
Part 4 : Discuss the factors that influence pricing decisionsin practice.
Chapter 5 2
Theoretical Capacity1000 u
Practical Capacity800 u
Expected Capacity
700 u
200u
1
0
0
Un avoidable
interruption
Idle Capacity
Excess Capacity
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Managerial Accounting and control
Dr. Mohamed YoussefLecture 4
Theoretical Capacity: The Maximum number of units can be produced inpractice
Un avoidable interruption : Due to bad quality of row material for example
Practical Capacity : What can actually produced
Expected actually Capacity : What we decided to produced
Expected actually capacity based on demand available in local demand
Demand > P.c --------- Idle Capacity
Demand < P.C ------- Excess Capacity
Managerial Cost : an additional cost resulting from producing one additional
unit ( F.C+V.C)
Example: Unit cost price 5 Volume Total Total
1 2000+5 20052 2000+10 2010
100 2000+500 2500101 2000+505 2505
Managerial cost equal 5
Managerial Revenue : an additional revenue resulting from sale of one
additional unit
Example: Unit sales price 50 Volume Total Total
100 5000+500 5500101 5000+505 5505
Managerial revenue equal 50
Price elasticity: is the effect of price changes on sales volume
Difference in price / deference in sales
If we change price by 10 % what I
Sales Price1000 151200 14,5
Price elasticity = 0.5 /200
Chapter 5 3
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